Compulsorily Convertible Debentures

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Overview:

Foreign investors from Mauritius, Cyprus and Singapore have been on the receiving end of a number of notices for gains from investment in compulsorily convertible debentures (CCDs) issued by Indian companies.

About Compulsorily Convertible Debentures:

 

  • It is a type of bond which must be converted into stock by a specified date.
  • It is classified as a hybrid security, as it is neither purely a bond nor purely a stock.
  • A debenture comes in two forms
    • Non-convertible debenture: It cannot be converted into equity shares of the issuing company. Instead, debenture holders receive periodic interest payments and get back their principal at the maturity date, just like most bondholders.
    • The interest rate attached to them is higher than for convertible debentures.
    • Convertible debentures: May be converted into the company’s equity after a set period of time. That convertibility is a perceived advantage, so investors are willing to accept a lower interest rate for purchasing convertible debentures.

 

What is a debenture?

  • A debenture is a medium- to long-term debt security issued by a company as a means of borrowing money at a fixed interest rate.
  • Unlike most investment-grade corporate bonds, it is not secured by collateral.
  • It is backed only by the full faith and credit of the issuing company.

 


Q1) What is a bond?

A bond is a debt instrument issued by governments, municipalities, corporations, or other entities to raise capital. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount (the initial investment) at a specified maturity date.

Source: Investors from Mauritius, Singapore, Cyprus under Taxman’s lens for CCD gains